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Why do the rich hide money offshore, anyway?

Tax-avoidance aside, offshore accounts offer a level of secrecy and asset protection the rest of us could never afford


 
muffled money. Nicholas Belton/Getty Images

Nicholas Belton/Getty Images

In the shadowy world of offshore banking, several countries immediately come to mind when it comes to secrecy—Cook Islands, Belize, Seychelles, Panama.

Well, that was until Panama dropped off that list Sunday when a massive data leak of 11.5 million documents from Panamanian law firm Mossack Fonseca gave the entire world a glimpse at the names of the many wealthy people who were sure their assets were hidden out of sight.

But as the revelations of hidden accounts and elaborate paper trails have come to light, defenders of offshore accounts have stressed they don’t necessarily mean anything illegal is going on. To make sense of it all, we asked a few experts why the rich might feel the need to hide money overseas—presuming they aren’t trying to avoid taxes back home.

Q: So why do the rich stash money in offshore accounts?

Assuming everybody is law-abiding and paying their fair share of taxes back home, experts say the two main reasons for hiding money offshore are 1) asset protection and 2) secrecy.

Say you own a mining company, for example, and have concerns about one day being sued for potential environmental problems. Keeping money stashed away in a trust can potentially stop future creditors from getting everything. But offshore trusts offer an extra layer of protection.

“As a Canadian, you might be able to put it in a Canadian trust. As a matter of creditor-debtor law, it’s not yours anymore—and maybe creditors can’t come after it—but you’re worried that laws could change,” says Geoffrey Loomer, an assistant professor at Dalhousie’s Schulich School of Law. “So not only do you put it in a trust, you put in an offshore trust that the creditors will never even know about.”

That means if a someone successfully sues you for $20 million, but you only have $300,000 in your bank account, the many millions you once earned are untouchable.

For those who aren’t worried about potential business ventures gone awry, but instead a potential divorce, offshore accounts might also be used to keep money hidden from an ex-spouse, though that could bring up a host of legal problems.

Aside from trying to protect one’s wealth from creditors, the rich might open an offshore account to add a layer of secrecy to their finances.

“If you have bunch of money and you don’t want your adult children or a long-lost brother to know about it, there’s an argument that I want to keep my money as far away from those people as possible,” says Mitchell Stein, an assistant professor of managerial accounting and control at the Ivey Business School. “I don’t report taxes or corporate issues to them. I don’t want them knowing about my money.”

Q: In Canada, do people have to disclose their offshore assets to CRA at tax time?

Yes, but if you go back 15 years ago, Loomer says, the rules were more lax on reporting foreign property.

But to say the offshore accounts revealed by the Panama Papers leak are legal assumes that individuals are as forthcoming with their taxes as possible.

“The problem with these documents is maybe they are [being honest], maybe they aren’t,” Loomer says. “If they’re in organized crime, they probably aren’t. If they are just people with money and investing it offshore, maybe they are. You need to ask: why do they need all this secrecy?”

Related: Why Canadians should get mad over the Panama Papers

Q: Is there a legitimate reason why a person would want that much privacy?

If one is very wealthy, Loomer says, they might argue it’s nobody else’s business if they lease three Bentleys or buy a second waterfront property in Vancouver. “There’s no reason anyone needs to know I bought this painting at a Sotheby’s auction. I don’t want to be in the news,” Loomer offers as an example. “I deserve a private life, so I purchased that Picasso through a corporation, all the shares of which are owned by a trust that I’m a beneficiary of.”

Q: How much money do you need in order to make an offshore account worthwhile?

Just because offshore accounts can be lucrative for the rich doesn’t mean they would be beneficial to everyone. The majority of Canadians don’t even reach the maximum contribution levels for their Tax Free Savings Accounts. “You really have to have accumulated capital that you’re investing, so you’re earning investment income,” Loomer says. “Most middle-income people don’t have investment income.”

Even a physician or lawyer making upwards of $250,000 probably still isn’t earning enough for an offshore account to be worthwhile, he says, especially after accounting for the legal and accounting costs in Canada, plus paying the foreign jurisdictions to set up the account.

“It’s worth it if you’ve accumulated family wealth—in the $5 million-plus range and you’re earning five per cent or more per year,” Loomer says.

Which is exactly why he says people have the right to be angry about such offshore accounts. “It’s a two-tiered system, but it’s not transparent,” he adds. “We don’t say ‘If you have $5 million a year, your tax rate is lower than everyone else’s’. That’d be completely unfair. People would be outraged. Yet here’s a non-transparent way for you to get the same result.”


 

Why do the rich hide money offshore, anyway?

  1. Excellent article. Very informative. Leads one to possible tax/legal/reporting changes to ensure “fairness”, That is what people are unpset about. Have they paid their fair share of taxes. Now corporations, auditors, lawyers and shareholder’s would be concerned with “disclosure”. In both family law and civil law areas. Of course everyone jumps to the conclusion that all “monies” are dirty or underhanded. So this is a wake up call to make changes to ensure compliance with tax reporting at a minimum. Maybe while at the same time offerring some degree of privacy protection for whatever personal reason.

  2. (autocorrect typo? Tiered, not tired?)

  3. This is what happens when money changes from a means to an end to become the actual and only end.
    The CRA has known for a long time that computers move money around the world in transactions that are easy to track, tax and collect, they just don’t do it. Trusting people and corporations to declare and pay tax on this money has turned into a mugs game. As super rich Leona Hemsley said “only the little people pay taxes”

    • Actually Dianne,

      The little people are the ones demanding that the rich pay taxes. The article failed to note the most obvious reason people stash money away from the tax man.

      Governments simply get greedy and take too much. Simple as that. If a wealthy person works hard and saves their money, it probably ticks them off when some idiot decides he is going to take it simply because he won an election based upon the votes of folks who are not paying the bills.

      • Actually James,

        Rich people get more money back or taxes forgiven (the taxes forgiven on $ billions of duty owing for corporations and family trusts taking money out of Canada tax free) from the CRA. All Canadians would benefit from a revamp of the tax system. Remove the taxes on $30,000. for everyone and introduce a flat tax for all the rest -NO EXCEPTIONS OR EXEMPTIONS.

      • Taxes pay for police and our system of law as well. If the rich don’t want to pay for these protections, the upset proletariat can always redistribute.

        Taxes pay for (among many other things) a continuation of the system that enables people to keep their standard of living.

  4. The only acceptable reason listed here is wanting privacy. I wouldn’t want people to know how much money I had, as that would make me/my family a potential ransom target. If moving clean money to an offshore account can hide what I own/buy – go for it.

    But the rest of them (particularly the first point) are BS. If the courts decide you have wronged someone, and owe them money – you should have to pay that before keeping the rest. Wherever it is. “Legal” loopholes like that are why there is so much opposition to infrastructure projects. Many people are (rightly) afraid of a catastrophic fault, and only a small wing of the company taking any punishment.

    Investigate thoroughly, and prosecute all wrongdoings. Make the penalties stiff enough to make other people think twice about offshore cheating.

  5. The unstated premise of this article is that the wealthy are crooks and tax evaders.
    In realty, there is nothing intrinsically illegal with the use of an offshore tax avoidance scheme when carried out within the Canadian Tax Code..
    I wouldn’t be surprised if MacLeans Magazine owners availed themselves of this sophisticated but entirely legal tax plan.

    • BS. 90% of the people using them are for ill gotten gains. To hide money from lawsuits, divorces, or to stash their bribes and kick-backs, along with drug money and buying and selling high end goods like art and yachts without paying sales taxes.

  6. Anyone that has extensive business in another country should have accounts in that country’s currency if they have substantial financial obligations in that country just to ensure cost certainty: one never knows when the Canadian dollar will tank and your condo fees or whatever will jump up 20%. It would also be remarkably difficult for anyone who wants to carry on some business in a foreign country if they were reduced to hand-carrying funds $10,000 at a time.
    Anyone who has more money than covered by deposit insurance should surely find a way to put their money in a secure insured place. Anyone with global financial interests would be foolish to hold all their wealth within a single country especially one with limited liability financial institutions.
    It would be irresponsible for someone with an interest in a large enterprise not to create a corporate entity to contain and protect potential liability and to separate corporate interests from personal interests.
    What about RBC? If they stopped helping enterprise from establishing foreign accounts, Canadians would be at a substantial disadvantage for any export or import business.
    Or let’s all just sit around in log cabins and keep all our extra cash in a chink in the fireplace.

    • I recommend making invests with that extra money and gain assets. Reason why the rich get tax breaks is to put into motion “trickle down economics” which hasn’t been working very well because of this. Many complain about the police or public infrastructure to the homeless yet want to avoid paying the taxes that are used to circulate that money than just sitting in a bank account. What will happen if the economy stops.? No one to buy your goods. Homeless and the dying and no one to afford medical care? I will just sit on giant stash on my own stash of money on a island and take it to the grave with me.

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